How to Invest in Bullion

by Eric Bank

The precious metal bullion market has been marred by a number of scams, so proceed with caution.

Modern portfolio theory advises investors to purchase a wide variety of asset classes, such as stocks, bonds and precious metals. Different asset classes have low price correlation, which means if one class is doing poorly, another class might be doing well, evening out your overall risk. Bullion is bulk precious metal, including gold, silver, platinum and palladium. You can purchase it as bars, ingots or coins. The bullion market has had its share of scams, so you must proceed slowly and knowledgeably.

Learn how the bullion market operates. The value of precious metals is set in the spot market, which is the market for immediate delivery of the metal. Bullion sellers establish a spread -- the difference between their buy and sell prices -- which is the source of their profits. Smaller spreads are good for buyers. If you buy bullion coins, find out the melt value of the coin types that interest you. Melt value is the intrinsic metal value of a coin if it is melted down. This information is widely available on the Internet, as is extensive information about the bullion market.

Select your investment vehicles. Silver is more affordable than the other precious metals, which can be important for young investors without a lot of money to invest. The price per troy ounce drops for larger coins and ingots, so it makes sense to buy the largest sizes you can afford. Ingots are available in larger sizes than coins. Coins may be easier to sell as they are easily recognized and are of known origin. Ingots are privately smelted and require more authentication.

Select dealers. The U.S. Mint sells American Eagle bullion coins and the Canadian Mint offers Maple Leafs. Both sell for a small premium above melt value. You can add these two coin types to a traditional individual retirement account and receive tax benefits. Bullion can also be purchased from banks and dealers. The Federal Trade Commission advises you check into the background of dealers through your state attorney general's office and local consumer protection agency. Also, check for comments about dealers on the Internet. Always secure a certificate of authenticity guaranteeing the precious metal content of the bullion you buy.

Execute a purchasing plan. Your plan may be to time your purchases to coincide with price dips in the metals markets. Or you may decide to use dollar cost averaging, which requires same-size periodic payments. Through averaging, you’ll buy less bullion when prices are high and more when prices fall. Your budget should take into account additional costs of insurance and storage. If possible, purchase with a credit card so that you have some leverage in a dispute.

Take physical delivery. The FTC advises never to have your dealers store your bullion for you, since they may cheat you. Depending on your budget, you may find a safe deposit box sufficient, but you will need space in an insured depository if you purchase a lot of bullion. One way or another, make sure that all your bullion is insured against theft and damage.

Tips

Keep track of all your costs, since they will either be immediately deductible as expenses or raise the cost basis of your bullion when you sell it.

Profit from bullion sales will be taxed at the long-term capital gains rate if you hold the bullion for over a year. Losses can be used to offset gains and up to $3,000 a year of ordinary income. Unused losses can be carried forward to future years. Bullion in a traditional IRA, however, is taxed as ordinary income when withdrawn.

Warning

The Commodities Futures Trading Commission devotes a web page to dozens of different ways metal dealers can defraud or mislead you. Never succumb to high pressure tactics or leveraged sales contracts, in which you only put down part of the purchase price. These are frequently fraudulent schemes to separate you from your money.

Resources

Outsmarting the Scam Artists: How to Protect Yourself From the Most Clever Cons; Doug Shadel

About the Author

Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.